In order to promote the sound development of OTC financial derivative market and establish a centralized clearing mechanism for OTC trading of financial derivatives, the trading of RMB interest rate swap and other OTC financial derivatives among the national inter-bank bond market participants (market participants) should go through a centralized clearing arrangement in accordance with the requirements and the Shanghai Clearing House shall provide the centralized clearing services. This Notice is to make announcements about the following:
1. The centralized clearing business of RMB interest swap in this Notice is about the practice of market participants submitting their deals of RMB interest rate swap to the Shanghai Clearing House for centralized clearing, which shall in turn, as the central counter-party (CCP), take over the rights and obligations of the two parties, calculate the net interests due on the same settlement day for the market participants in accordance with the multilateral netting system, establish the necessary risk control mechanism, see to it that the contracts are honored and implemented and complete the processing of net interest settlements.
The trading of RMB interest rate swaps should be confirmed through the trading system of the National Inter-Bank Funding System (Funding System).
2. A market participant shall sign an Agreement on Centralized Clearing of RMB Interest Rate Swap with the Shanghai Clearing House.
The RMB interest rate swap deals to be centrally cleared by the Shanghai Clearing House shall be subject to the Agreement on Centralized Clearing of RMB Interest Rate Swap signed between the market participants and the Shanghai Clearing House.
3. Starting on the day of the release of this Notice, the Shanghai Clearing House shall provide RMB interest rate swap centralized clearing service for the market participants.
Starting from July 1, 2013, the RMB interest rate swap deals reached between financial institutions with FR007, Shibor_ON and Shibor_3M as the reference rates and with a maturity of five years and less, shall be submitted to the Shanghai Clearing House for centralized clearing so long as the parties to the deals and the elements in the contracts are consistent with the relevant provisions of the Shanghai Clearing House. Any deal that is not centrally cleared shall be explained to the People’s Bank of China.
4. The Shanghai Clearing House shall establish a mechanism for strict RMB interest rate swap centralized clearing with proper institutional arrangements, sufficient staff and systems, including but not limited to the following:
Establishing standards for the participants of centralized clearing business and a system for monitoring and assessing the credit risks of the participants;
Establishing risk management arrangements including margins, clearing fund, risk reserves, and etc, reasonably evaluating the mark-to-market value of the position and risk exposure of a centralized clearing participant, and carrying out regression and stress testing on a regular basis;
Establishing a mechanism to address default by a centralized clearing business participant, and implementing bank credit line and other liquidity support measures, to ensure the sound operation of clearing business;
5. The margin and clearing fund contribution submitted by a market participant to the Shanghai Clearing House belongs to the participant and shall be used only for covering the obligations and claims arising from centralized clearing and the possible default.
The Shanghai Clearing House shall separate the margin payment and clearing fund contribution of market participants from its own assets and must not use the margin or clearing fund for other purposes.
6. A centralized clearing participant shall make sure the balance in the corresponding account is sufficient for fund and margin settlement.
The fund or margin that is in the process of settlement can only be used for this settlement deal and shall not be revoked once the settlement is completed.
7. The People’s Bank of China will regulate and supervise the Shanghai Clearing House effectively and on a continual basis in accordance with the standards of qualified central counter-party as defined in the Principles of Financial Market Infrastructure, and etc.
The market participants shall calculate risk-weighted asset of the RMB interest rate swap deals centrally cleared by the Shanghai Clearing House in accordance with regulatory requirements on deals with the qualified central counter-party.
8. The National Interbank Funding Center and Shanghai Clearing Center shall step up cooperation and coordination, monitor the RMB interest rate swap trading and centralized clearing respectively on a daily basis, and report in writing, within the first 10 business days of a month, the RMB interest rate centralized clearing business in the previous month to the People’s Bank of China and send a copy to the National Association of Financial Market Institutional Investors. Any anomaly, once identified, shall be promptly dealt with and reported.
9. The Shanghai Clearing House shall provide to the PBC Shanghai Head Office, Branches, Operation Offices, sub-branch offices in the provincial capitals and cities with a deputy provincial level information of RMB interest rate swap centralized clearing business participated by the financial institutions within their respective jurisdictions.
The PBC branch offices shall step up day-to-day oversight of financial institutions within their jurisdiction in their participation of centralized clearing of RMB interest rate swap.
10. The National Interbank Funding System and the Shanghai Clearing House shall formulate detailed rules for the trading and centralized clearing in accordance with the requirements in this Notice, report to the People’s Bank of China, and implement the rules after the PBC’s approval.
11. The PBC shall decide on the category and product variety of other OTC financial derivatives to be centrally cleared in view of the risk exposure of OTC derivatives, frequency of trading, sophistication of pricing mechanism, their degree of being standard deals, and the preparedness of the designated institution for centralized clearing.
12. The Notice shall be implemented on the day of its release.